Vice President of the European Commission responsible for Competition Policy

Reform of EU State aid rules on the Services of General Economic Interest

90th Plenary Session of the Committee of the Regions

Brussels, 12 May 2011

President Bresso,

Honourable members,

Ladies and Gentlemen:

I wish to thank the Committee of the Regions, and in particular President Mercedes Bresso, for the kind invitation to talk about the reform of the State Aid Package on the Services of General Economic Interest.

This is a major policy initiative that will lead to the reform of the rules that we use to check if the government financing of public services is compatible with the internal market.

The Lisbon Treaty gives Member States a broad room for manoeuvre to provide services such as public transport, hospitals, and the post.

It also gives the European Commission the task to make sure that the resources they use to finance these services do not distort competition in the internal market.

Our control does not include all public services, but only the services that are economic in nature. I have to add that the distinction between economic and non-economic services is provided by the Court of Justice.

At present, we carry out this task using a package of measures called the Monti-Kroes package. The package needs to be reviewed before the end of the year and will be replaced by new instruments in December this year.

Last March, the Commission issued a Communication to prepare the reform; over the next few weeks, I will collect the views and suggestions that it prompts from our different stakeholders.

I intend to involve as many institutions and organisations as possible in this process; including the European Parliament, the Member States and – today – you, the representatives of Europe’s regional and local governments.

We have already studied the views of the associations, non-governmental organisations, and public authorities that responded to the public consultation we conducted last year as part of our review.

I regard my conversation with you today as a crucial stage of the process, because your level of government is closer to the reality on the ground.

You know first-hand what it means to design, finance and provide a public service and you have a better sense of our citizens’ needs and expectations.

Therefore, your views and suggestion are essential for us to understand how the new package can help public authorities and service providers to meet these needs.

Let me anticipate the broad objectives that I believe this reform should pursue.

First and foremost, I want to help you make the services more efficient, without straining your budgets, giving the citizens better value for money.

Second, I want to define rules which will be clearer and simpler, which means easier for you to apply.

Finally, I want to diversify our scrutiny and focus it on the public financing of the services that have a significant impact on the internal market.

I will soon put to you some concrete ideas to stimulate our debate; but first, I want to give you a measure of the importance I attach to the reform.

There are many reasons why I regard this reform as a major policy initiative, and one of them is that public services touch all European citizens directly and can have a decisive impact on their lives.

Think of education and training, for instance.

We demand the best from our systems of learning, because in the knowledge economy the quality of our training centres and universities is crucial for the future of the young generations and a key factor of growth for Europe’s economy.

Education illustrates another typical function of public services; that is, building a more equal Europe.

Public services can give underprivileged Europeans a chance to close their social and economic gaps.

This is an important function, because inequality has been rising in the majority of developed countries in Europe and elsewhere at least since the mid-1980s.

Public services are an economic resource alongside income – think of public housing, for instance – but have a more equal distribution than income. As a consequence, they can reduce inequality directly.

According to a recent OECD estimate, on average public services reduce income inequality by a fifth in developed countries.

In short, public services are an essential element of Europe’s model of society. They are an asset that we need to leverage to the full because they can help us meet the demand for a fairer and more just society that comes from our citizens.

But these are not only my ideas.

The Lisbon Treaty has given greater emphasis to public services; which is excellent news for Europe’s citizens.

Protocol 26 stresses the need for high-quality and affordable services for all, while Article 14 provides a new legal basis for the European Parliament and the Council to establish the principles and conditions required for Europe’s public services to fulfil their mission.

This reform is part and parcel of the broader policy of the European Commission to strengthen the internal market and is one of the initiatives of the Single Market Act that we adopted last April.

However, the reform is not based on Article 14 or protocol 26. It is based on Article 106 of the Treaty, which grants the Commission exclusive power to assess the compensation for the provision of public services, i.e. to deal with State aid.

Ladies and Gentlemen:

Let me now turn to these State aid rules.

As I said, at present we carry out our control according to the Monti-Kroes package, which was introduced in 2005 after the landmark Altmark decision.

In it, the Court specified a set of conditions which helped us to identify which compensations of public services were State aid and which were not.

What has been our experience in the implementation of these rules?

One thing we have noticed is that our scrutiny is too uniform across the spectrum, from large market players that operate on an international scale, to activities organised by small local authorities.

I think that the new rules should be matched to the size and nature of the services, because the sports and recreation activities of a small town have scarcely any impact on competition and the internal market.

In contrast, there is no doubt that the large companies that provide services such as waste management, energy and post are in competition with other companies in Europe.

But the best indications of how the current rules work in practice have come from the public consultation of 2010.

The consultation has revealed that the rules are not always well understood, including some of the core notions of our assessment, such as:

which activities constitute an economic activity subject to our scrutiny, and which do not.

the question of which public services should be regarded as services of general economic interest;

the notion of an effect on competition and trade between Member States; and

the conditions spelled out in the Altmark decision I referred to earlier.

Looking at our experience and at these findings, it seems obvious to me that the new package should be clearer and more flexible. Let us see how we can make it happen.

First, our rules should be clearer. This is a must, because if you and your providers find the rules too complicated it’s going to be hard to comply with them.

One challenge here is that each Member State has its own organisation of the various levels of government and therefore of how public services are designed and financed.

In addition, the services themselves are not uniform across the Union and reflect the different traditions.

As a consequence, it won’t be easy for us to clarify once and for all ­– say – whether a given activity constitutes an economic activity, because this changes across national boundaries.

Take education for example.

When organising this service, you also decide whether it will be economic or not. Basic education financed directly by the State and offered to all would normally not be regarded as economic. But the situation is of course very different for higher private education paid by students or their parents.

Another point that can be made clearer is the interaction between State aid and public procurement rules.

I know that it’s not easy for many of you to reconcile regimes that work in a different way and I think that we should try to bridge the gap.

Take the example of a mayor who organises a tender for a service according to the procurement rules.

Perhaps under our new rules the use of the tender procedure could automatically remove any competition concern.

Finally, we have been asked to clarify the notion of reasonable profit. The issue here is that this notion depends on who shoulders the commercial risk.

For example, the reasonable profit of a bus operator depends on who bears the risk of a rise in the price of fuel.

You, as regional and local authorities, may decide to share this risk with your contractors or to compensate all the company’s costs – in which case commercial risk would not be an issue.

In sum, although no benchmark can cover every case, what if we introduced a safe–harbour threshold below which the profit is always treated as reasonable?

This would make your life a bit easier, I guess. Suppose you are awarding a contract for waste management. With a safe-harbour provision, you would only have to check that the premium you are paying on top of costs stays within the limit.

The second task is finding the best ways to adapt our scrutiny to the nature and size of the services. This task can be broken down into two parts:

On the one hand, we need simpler and lighter rules for small-scale public services and for certain types of social services;

On the other, we need better instruments to assess the cases with clear potential implications for the internal market.

Let me start with the first part: what criteria should we use to determine when the simpler rules apply?

We could look at the size of the compensation, which is the criterion in use today. At present, you do not need to inform the Commission if you grant up to €30 million to providers with an annual turnover of €100 million or less.

As an alternative, we could look at the size of the local authorities, whose activities – such child-care services and cultural centres – have little or no impact on the internal market.

To this end, we could set a population threshold under which a public authority is deemed to be too small to raise concerns. But where do we draw the line? What level best balances your needs and our duty to check that the aid does not distort competition?

As to the idea of extending these simpler rules to other types of social services than the current ones – hospitals and social housing -, you are best placed to answer the questions it entails.

The first, obvious question is: What is a social service? This is not as straightforward as it seems. In some of your constituencies, for instance, care for the elderly is provided on a purely commercial basis.

And once we have made this distinction, we will still have to ensure that the profits from social services do not cross-subsidise other activities of the same company.

Finally, there is the issue of what exactly the simplified rules will look like. Let us explore a few ideas.

When you finance a public service, the current rules ask you to check for overcompensation every year, even when the contract is for a long period. What if you were asked to check only once at the end of the contract?

Another idea concerns the notification exemptions I have talked about earlier. At present, the thresholds are almost the same across the board.

What if we introduced different requirements for different types of service? This could save the providers of certain social services a lot of red tape.

I will now move to the opposite side of the spectrum; that is, how to refine our assessment of large-scale commercial services.

At present, the aid can cover all the costs incurred by the service provider plus a reasonable profit margin, regardless of how efficient the provider is.

In times of budget consolidation, this clashes with the growing need to make an efficient use of public spending. Once again, let me put you some questions

What if the contracts included incentives for the service provider to become more efficient?

The system is not new, for instance it is already used in certain transport services. And the efficiency gains could be shared between the provider and the public authority, an arrangement that could bring fresh revenues to your coffers.

Another possibility is to mandate the use of tenders or of benchmarks to calculate the amount of the support, provided they don’t obstruct the performance of the service.

The tender procedure is the best means I know to select the most efficient provider and to get the best value for money.

But I also know that tendering can be a burden for public authorities and that it would not work in all cases.

We need to look for a balanced solution. For example, what about comparing an in-house provider with an independent competitor? How can this comparison be done?

Similarly, we have to find a balanced solution to the issue of services provided jointly by different public authorities.

We see more and more municipalities pool their resources to organise certain services together, such as waste treatment.

I commend these forms of cooperation when they make your services more efficient. But we also have to make sure that they don’t make the playing field uneven for commercial operators.

Ladies and Gentlemen:

These are the questions I have for today’s debate. I am looking forward to your response because you know better than most what our citizens expect from their public services.

I believe that good and accessible public services are essential for our economy, our wellbeing, and in the social and civic domains.

A large majority of Europeans share this view; but public services require financing from government budgets, and not every demand can be afforded in these times of dire straits.

I want to have a balanced approach. It is a mistake to look only at the cost of public services, we also need to look at their benefits.

Think of public transport, which can improve the quality of life in our cities and cut harmful emissions of greenhouse gases. Think of personal care for the elderly, which is a growing need as our societies age.

In sum, public services bring us countless benefits and are an asset for our economy and society.

I hope that our reform will help you and other public authorities across the Union make public services more efficient and sustainable so that we can leave them to future generations of Europeans.